Used Car Market on Fire

The used vehicle market is on fire again, spiking 5.3% in September, after 3 months of declines. The report comes from Manheim, the largest auto auction operator in the U.S. Several factors are a play causing an increase in demand of used vehicles and the spike in prices. First, tight supplies of new vehicles due to chip shortages and factory closures resulting from the covid crisis. Normal supply for used retail is about 44 days of sales. In September used retail supply was 37 days. Wholesales supply, which normally is 23 days, was 18 days. The low supply is also a result of a sharp decline in sales at auctions by the three largest categories of sellers in the wholesale market – rental vehicles, off-lease vehicles and repo companies selling repos. Since rental companies are having a harder time getting their hands on new vehicles, they are holding their rental cars longer. For the repo business, low lending rates and a moratorium on repos during the covid crisis have reduced the numbers of cars at used car auctions. Further augmenting used car sales is the federal stimulus money disbursed over the last year and a half. The covid crisis has created a “wealth effect” leading people to be flush with cash and willing to pay whatever price for a used vehicle as dealers make record gross profits along the way. In a telling sign, although it is often assumed that resale value of a new car plummets once sold, resale value of a 1-year old car is up 25%, over $7,759 according to Cox Automotive. https://wolfstreet.com/